By Peter F. Drucker, Clayton M. Christensen, and Vijay Govindarajan

Synopsis

Innovation is more than creativity; it is a process that is structured, with rules and best practices. This summary gives you some of the key takeaways from experts who take the mystery out of creating new products and services. Here are just a few of the key points you will learn:

Innovative ideas are not just something new, they provide value and solve problems.

It takes "buy-in" from an organization to support innovation.

Understanding customer's needs are critical to design new products.

Change requires analysis and testing just like any other experimental effort.

Minimizing risks is possible with the right approach.

Summary

Innovation's Holy Grail

Most innovation efforts focus on creating the most profitable results or appealing to affluent markets. However, there is a large market for inexpensive products driven by customers who are looking for more value for their money. The real opportunities in innovation are the ones that create affordability and fill a need for the masses.

Tata Motors of India is an example of how collaboration created an affordable innovation that fills a real need. The car company worked with other countries like Germany, Italy, Japan, and the United States to create a $2,000 Nano car. Each country contributed cost-effective components that reflected their particular area of expertise. The result of this collaborative effort is a quality-built, more affordable car.

Stop The Innovation Wars

Innovating requires a partnership between a dedicated team, people focused on creating something new, and the performance engine, teams responsible for established operations. These two groups compete for the same resources while their processes are very different. Friction between these two groups is inevitable, but there are three steps for reducing that friction.

Decide which responsibilities fall to the performance engine and which ones will be handled by the dedicated team.

Assemble the dedicated team. While bringing in outside team members can provide a “fresh set of eyes,” team members from inside the company can help bring the innovation team and the existing teams together.

Anticipate inevitable conflicts and be prepared to smooth things over with persuasion and positive feedback.

How GE is Disrupting Itself

GE achieved much of their success by offering high-end products across the globe. But the demand for more affordable products forced GE to change its focus. The company had to learn reverse innovation, the process of creating products in an emerging market and distributing them in developed markets.

An unexpected opportunity and management that was committed to reverse innovation helped jump-start GE's efforts. Rural clinics in China were unable to afford GE's ultrasound machines, so a local team built an inexpensive, portable ultrasound unit using a laptop with external hardware and specialized software. The new product created demand across China and helped GE get their reverse innovation efforts up and running.

The Customer-Centered Innovation Map

Consumers buy products to solve problems and perform tasks. Colleges buy software programs to streamline admissions. Electricians buy meters to test electrical work. Maybe these insights are obvious, but most companies do not look for opportunities from this perspective. Most companies are on the look out for the "next big thing" while plenty of opportunities are right in front of them. Companies can identify those opportunities by using "job mapping."

Job mapping means looking at all the steps involved in a task. By breaking down each step of a task from beginning to end, a company can find areas of the process that can be improved. This focus on the individual parts reveals areas of opportunity that could be missed when looking at the task as a whole. Using the job map, a company can analyze the shortcomings of a product or service, and begin to create solutions.

The Innovation Value Chain

The innovation value chain means looking at new ventures from beginning to end to identify obstacles and opportunities. Most companies do not have a proper process for testing a product's worth or an understanding of adequate funding. By using the innovation value chain, companies can take practical steps to get a product to market.

Idea generation — Find the existing strengths and weaknesses of the organization and understand how they will affect a new idea. If there is a weakness that could cause obstacles, then get rid of those obstacles is now a part of bringing an idea into development.

Idea development — Does a company have existing resources that can handle producing a particular product? If new equipment is needed for manufacturing, then the cost may prevent the product from moving forward.

Diffusion of developed concepts — This means understanding how an organization's current way of doing things can stifle innovation. If the rest of the company does not see the value in a new idea, then they will not support it.

Is It Real? Can We Win? Is It Worth Doing?

Companies know they should innovate, but they are afraid of the risks. That said, much uncertainty can be eliminated by a screening process.

Is it real? — Is there a market for a product and can the product be made? The answers come from researching the demand. Does the product solve a problem better than something already out there? If there is a demand, can the product be manufactured at a reasonable cost? The answers will determine if a product is “real” or not.

Can we win? — A company has to determine if they can get and maintain enough market-share. If the company comes up with a new idea, they can be sure the competition is close behind. In established markets, existing companies could just copy or piggyback on the idea with minor changes.

Is it worth doing? — Analyze the financial costs and determine how the product fits with current strategies. Will the product be profitable? How long will it take to see a return? Does the product reflect the current culture of the company? The answers will determine if it is worth doing.

Innovation: The Classic Traps

Hurdles too high, scope too narrow — Companies tend to seek out new ideas that will result in premium prices and excellent margins. Innovations that don't project high revenues over a short time are screened out of contention. This focus on significant returns while trying to limit risk means many companies miss the smaller opportunities. Companies must solicit ideas, both big and small, from people inside and outside the organization. The result will be more ideas, increasing the likelihood of finding the ones that will work.

Controls too tight — The tight controls of an established organization restrict innovation. Innovative teams need the flexibility to react to unexpected results. The “standard operating procedures” of most companies just get in the way. Companies must redesign processes, from how funds are allocated to how performance is measured, to give innovative teams room to breathe. New ideas require new rules.

Connections too loose, separations too sharp — Creating a new product requires support from the whole company. Innovative teams can feel isolated and end up feeling less valuable because of the lack of support. The rest of the company could feel “out of the loop” or even resentful. The solution is to create connections between the innovators and the rest of the organization. The new venture will have more visibility and gain acceptance by encouraging the innovators to report on their efforts regularly.

Discovery-Driven Planning

Discovery-driven planning must replace conventional business planning when it comes to innovation. Where conventional planning would tend to see assumptions as facts, discovery-driven planning sees them as guesses that must be tested and questioned. The “discoveries” that result from testing assumptions are critical to creating something new. These discoveries are used to determine the direction and focus of an evolving plan.

Conventional business planning cannot handle the uncertainty of results or the need for flexibility that are natural parts of innovation. Discovery-driven planning focuses on activity and learning rather than results. The real potential of a new venture is discovered as it develops, a potential that would remain undiscovered by conventional business planning.

The Discipline of Innovation

Learning where to look for new opportunities and understanding their potential is an essential step in innovation. With practice, it is possible to spot which opportunities are too risky and the ones that have real potential. Most opportunities come from seven sources:

Unexpected occurrences — Be on the lookout for products that are trending better than expected and capitalize on that growth.

Incongruities —Find the gaps between what is and what should be to find opportunities for improvements.

Process needs —Focus on customer's problems and find ways to make their experience better, faster, or easier.

Industry and market changes —From deregulation to new technology, external forces and their impacts must be monitored for changes that provide opportunities.

Demographic changes — Demographics are always in flux. Keeping up with the constant changes can reveal new markets and give more insight into existing markets.

Changes in perception —The “cutting-edge” product of yesterday can become obsolete quickly as consumer's attitudes change. These changes in perception can diminish or create demand, providing an opportunity to respond to those changes.

New knowledge —Keeping abreast of advancements in technology and changes in business methods give companies the new knowledge they need to stay ahead of trends.

Innovation Killers: How Financial Tools Destroy Your Capacity to Do New Things

Most companies want to innovate, but existing financial policies are a difficult hurdle. Companies decide where to invest their funds based on a projected return. They use facts, statistics, and other data to determine if an investment will create profit. However, with innovation, those facts and other data are not available because innovating deals with assumptions. Companies tend to view new ventures using the same criteria as traditional business efforts, so they often find that there is insufficient "evidence" to warrant an investment.

Without any evidence to support predictable outcomes, many companies choose to do nothing. They assume that the current offerings of their business will continue to produce sufficient profits, so it is easier just to say "no" rather than take the risk. However, by avoiding the risk, companies are also avoiding any potential rewards that can be extracted by innovating. Companies need to develop a better understanding of the innovation process so they can create new rules for how these ventures are funded. These companies must understand that while innovating is unpredictable, it is also something that can be measured, limiting the risk.